H & R Block, Inc. v. Testerman

• Decision Date: 26 May 1975
• Docket Number: No. 174,174
• Citation: 338 A.2d 48,275 Md. 36
• Parties: , 81 A.L.R.3d 1107 H & R BLOCK, INC., et al. v. Glenn B. TESTERMAN et ux.
• Court: Maryland Court of Appeals

Page 36

275 Md. 36

338 A.2d 48, 81 A.L.R.3d 1107

H & R BLOCK, INC., et al. v. Glenn B. TESTERMAN et ux.

No. 174.

Court of Appeals of Maryland.

May 26, 1975.

William F. Abell, Jr., Rockville (Heeney, McAuliffe & Rowan, Rockville, on the brief), for appellants.

Walter H. Madden, Rockville (Thomas D. Murphy and Michael Francis O'Connor, Rockville, on the brief), for appellees.

Argued before SINGLEY, SMITH, DIGGES, LEVINE, ELDRIDGE and O'DONNELL, JJ.

LEVINE, Judge.

We granted a Writ of Certiorari in this case to consider the ultimate question whether one may recover punitive damages, and may include mental anguish as an element of compensatory damages, in an action for negligent preparation of income tax returns. A decision by the Circuit Court for Montgomery County (Miller, J.) sitting without a jury, rejecting these damage claims, was reversed by the Court of Special Appeals in Testerman v. H & R Block, Inc., 22 Md.App. 320, 324 A.2d 145 (1974).

In their declaration, appellees, Glenn B. Testerman and Grace I. Testerman (jointly referred to as the Testermans), sued appellant, H & R Block, Inc. (Block), for damages in both tort and contract. The Testermans alleged that Block 'negligently, wantonly, maliciously and intentionally' prepared their 1967 and 1968 federal income tax returns incorrectly. In consequence thereof, they claimed compensatory damages of $50,000, including an allegation of mental anguish, and punitive damages of $100,000.

In the latter part of 1967, the Testermans commenced to operate a service station in Mt. Airy as a sole proprietorship. With a view towards the preparation of their 1967 tax return, they visited the Block office in Frederick in March 1968. They brought with them a cardboard box containing various materials including cash register tapes, 'profit control books,' cancelled checks, check stubs and 'parts bills.' They had been induced to patronize Block by an advertisement which boasted 'that they are tax experts.' Upon entering the establishment, they met Joseph B. Dunn (Dunn), the operator of that particular franchise location, and now the other appellant in this appeal. After leafing through the profit control book and the check stubs for some 45 minutes to an hour, Dunn announced to the Testermans that they had 'lost money' in 1967. In no mood to disagree, the Testermans acquiesced and returned in four days to pick up their completed returns, which they signed and forwarded to the Internal Revenue Service (IRS).

Understandably satisfied with their prior result, and mindful of the Block advertisment that 'they will pay the penalty and interest if they make a mistake, and (that) they are tax experts,' the Testermans returned a year later for the preparation of their 1968 tax return. ¹ On that occasion, they were referred by the receptionist to another employee-a Mrs. Weisberg. As they had done a year earlier, they handed her a cardboard box containing materials for the year 1968. In a manner reminiscent of their initial visit, she examined the profit control record book for approximately one hour, and then informed the Testermans that they had 'lost money' in 1968. By this time, the Testermans were overcome by curiosity and asked how it was possible for them to have 'lost money' when, in fact, they had made an adequate livelihood and had drawn cash from the business for their personal use. Mrs. Weisberg replied that 'everybody loses money the first couple of years they are in business'; and that the money transferred from their business account to their personal checking account 'was hard earned money that was not taxable.'

In addition to preparing the 1968 return, Mrs. Weisberg amended the 1965 Testerman return by utilizing the 1968 loss as a 'carryback,' thereby producing a refund of taxes for the earlier year. This proved to be more than the IRS could endure. One of its agents visited the Testermans in January 1970 to audit their books. They released the same records to him that they had previously delivered to Block. Two weeks later, the agent returned and charged '. . . you put $10,000 in your pocket . . ..' Mr. Testerman made no effort to conceal his disbelief; he replied 'you are out of your goddamn mind.'

Undaunted, the IRS agent submitted a report to the Intelligence Division in which he recommended prosecution because he had concluded that the understatement of income was deliberate and had been made with intent to file a false return. Recognizing the Testermans' limited education and apparent honesty, however, the Intelligence Division recommended that there be no prosecution.

The Testermans confronted the Block employees with the records and 'the figures' which they had received from the IRS agent. When it became apparent that they could not obtain a satisfactory solution from Block, Dunn eventually suggested that they consult an attorney. They not only followed this advice, but also conferred with a certified public accountant. Ultimately, they engaged another accountant who, as had the first, advised them that the IRS was correct and Block was not. Upon the recommendation of the two accountants, the Testermans paid the delinquent taxes, interest and penalties.

Both accountants employed by the Testermans appeared as expert witnesses at the trial. They testified, in essence that the Block personnel who prepared the returns were woefully inadequate-in terms of education and experience-for the tasks which they had undertaken. The errors Block had made bordered on the absurd. It had understated income for both years by deducting sums 'off the top' (from gross income) which the Testermans had drawn periodically from the business for personal use. Also, Block omitted from gross income the amounts paid for expenses from cash receipts at the service station, which, of course, had not been reflected in bank deposits. The records which the Testermans had delivered to Block, however, had accurately reflected all of these transactions.

After the IRS account had been settled, the Testermans and their accountant met with Dunn at his office to discuss possible reimbursement by Block. Dunn insisted-as he subsequently did at the trial-that he had made no errors, and that the Block office in Baltimore had therefore instructed him not to pay the penalties and interest. Tempers flared; Dunn then told the Testermans 'to get the hell out' and called them a 'bunch of trouble makers.'

At the trial, Mrs. Weisberg explained that Block merely prepares tax returns and does not audit the client's books. Since it must accept the figures furnished by the client, it can guarantee only the accuracy of its own computations. Despite the IRS audit and the consequences which had ensued, Mrs. Weisberg and Dunn insisted that the returns, having been based on the information received from the Testermans, were prepared correctly. They acknowledged that pursuant to the instructions issued by Block, fees are not refunded. If errors result in client dissatisfaction, a 'gift certificate' is to be issued for the following year.

Early in the trial, the Testermans proffered to show, as part of ther compensatory damages, that they had suffered mental anguish because of the 'wrongful acts' committed by appellees. The trial court ruled that such evidence was inadmissible because the Testermans had not suffered a physical injury. At the conclusion of the Testermans' case-in-chief, the court ruled, as a matter of law, that they could not recover punitive damages, since they had established that Block was guilty of mere negligence; such conduct, said the court, 'would not entitle them to punitive damages.' These two rulings set the stage for the successive appeals which have followed.

At the conclusion of all the evidence, the trial court entered a judgment for the Testermans uner the negligence count in the sum of $690.65 for the interest and penalties assessed against them, together with the legal and accounting costs they had been required to incur. An appeal by Block from that judgment was not prosecuted to a conclusion.

On appeal, the Court of Special Appeals reversed, holding that both punitive damages and mental anguish, the latter as an element of compensatory relief, were appropriate to this case. With regard to punitive damages, the court, relying on Smith v. Gray Concrete Pipe Co., 267 Md. 149, 297 A.2d 721 (1972) stated:

'. . . Whatever presumed or constructive malice may be in tort law, the most recent cases leave no doubt that malice as a sine gua non for punitive damages must be shown to be actual, but that the required showing may be made not only by direct proof, but with equal effect by rational inference from other facts directly proved. . . . (emphasis in original).

'What this boils down to, we think, is that when tortious conduct is accompanied by either a deliberate intention to violate the rights of others, or by a reckless disregard of the rights of others, it is committed with actual malice, or its legal equivalent, and punitive damages may be assessed against the wrongdoer.' 22 Md.App. at 348-49, 324 A.2d at 160 (emphasis added).

The court then concluded:

'. . . when Block held (Dunn and Weisberg) out as qualified tax consultants without limitation placing them in a position to undertake to prepare returns they were not competent to prepare, that policy or practice was in reckless disregard of the rights of others, and would support an award of punitive damages.' 22 Md.App. at 351, 324 A.2d at 161.

With regard to mental anguish, the Court of Special Appeals, after noting that exceptions to the 'impact rule' exist in Maryland, reasoned that such damages were recoverable in this case, saying:

'More analogous with the case before us are those tort cases brought for libel, slander, malicious prosecution and the like, which ordinarily involve no physical impact, and in which mental anguish is often the most substantial element of compensatory damage.' 22 Md.App....